November 2017 Investor Report

Published: November 4, 2017Updated: April 25, 2019

Overall, November was a busy month, as we initiated approximately 9 to 11 positions that we believe represent great value. We had a couple widely held bonds mature which created new cash available for investment. Going forward, December is going to be a crucial month with tax reform. The House and the Senate leadership still need to come to agreement over several issues. But, to provide an update over the Senate version of the tax bill, I offer a macro chart summary I created to help show the changes under this tax plan:

Investment Strategies

A merger arbitrage situation that we are currently monitoring for possible investment is the AT&T/Time Warner merger. Time Warner shares have sold off over the last 2‐3 weeks as the Department of Justice sued the two companies in attempts to block the merger. Time Warner stock fell from a 52‐week high in October of $103.90 to a current price range of $89‐$90 per share. This strange situation has run counter to forty years of antitrust enforcement precedent in vertical mergers. After one judicial recusal, the final say landed with one of the few Republicans left, US District Court Senior Judge Richard J. Leon.

Appointed by President George H. W. Bush, this judge has ruled on at least two notable antitrust matters in recent years. Beyond that, Leon has extensive experience in White House misconduct, having played a role in the Iran‐Contra Affair, the October Surprise task force, and the Whitewater Investigation. Judge Leon approved the NBC/Comcast merger, which is very similar to this merger. In clearing the NBC/Comcast transaction, Leon indicated that he at least has some amount of comfort with behavioral remedies in vertical mergers, something that should be considered positive for this AT&T/Time Warner. To some degree, the Department of Justice is asking him to overturn his own case law. The upside of the merger is a little over $100 per share, while the downside is closer to $82 per share. The risk/reward looks favorable, but we are waiting for more weakness in the TWX’s stock price before acting. The time frame will be less than 6 months.

Please review the following updates from some of our existing positions held in most of our accounts that we manage:

Star Bulk Carriers Bond (SBLKL) – A commonly held bond that is up ~7% in capital gains but has paid a robust 8% dividend yield while we held it, is getting called. On November 2nd, the company announced that they raised a new bond, scheduled to mature in 2022, to redeem our bonds early. We are certainly saddened to see this bond get called a year early; however, it has been a very good investment for us.

PHI Inc Senior Bond (CUSIP: 69336TAH9) – One of our largest positions continues to benefit from increases in energy prices. 3rd Quarter EBITDA came to $18 million, down from $20 million in Q2, but this confirms the $70‐$80 million range which first appeared last quarter. After seeing results in this range, for 2 quarters in a row, is very good news. Air Medical segment EBITDA came to $21 million, up from Q2 and up from 2016 levels, another excellent sign (flight hours also up). Oil & gas are still weak, but flight hours were up 8% from 2016, so it is very possible there may be a turnaround. Net debt comes to only

$200 million, which is $4 million lower than last quarter. Against Q3 run‐rate EBITDA of $70‐$80 million, leverage remains low. The bonds have continued to move up in price and now yield only 5.3%, but it’s now only a 15‐month bond.

As always, please feel free to reach out to us with any questions that you may have. We are grateful for the trust that you place in us.